As promised, the blog looks today at the USA’s trade position in polyethylene (based on data for the January-August period from Global Trade Information Services, the leading global supplier).

The chart shows US net trade (exports less imports). This peaked in 2009 (green column), with net exports of 1.6 million tonnes. Volume had risen 69% versus the 2007 level of 0.97MT (blue). But volume in 2011 has been just 1.03MT (light blue), only up 6% versus 2007.

The main reason is an overall decline in export volumes from 3.3MT in 2008 to 2.9MT in 2011:

• Mexico peaked in 2009 at 734KT, but is 679KT in 2011
• Latin America has been volatile, but peaked at 771KT in 2008
• China peaked in 2009 at 585KT, but is 192KT in 2011
• NEA peaked in 2008 at 178KT, but is 107KT in 2011
• SEA has been volatile, but 2011’s 292KT is a new high

Meanwhile, net imports in 2011 at 1.85MT are equal to 2007’s 1.83MT. These come mainly from Canada, whose volume of 1.19MT in 2011 is also similar to 2007’s 1.17MT.

Of course, many Western readers would have expected the USA’s exports to have risen since 2008, not fallen. Its cost position has improved remarkably since then, due to its new source of advantaged ethane from shale gas. The reason is that many of its major competitors do not share its financially oriented approach.

As the blog highlighted last week, most emerging economies also prioritise social and political criteria, whereby employment and strategic geo-political issues have an important role.

The blog’s own research on China’s Sinopec demonstrates how it effectively operates as a utility, supplying raw materials to the factories to keep people employed. Employment is also a key driver for the Middle East and many other Asian countries.

This is why an understanding of Prof Michael Porter’s Shared Value approach is so important for the future. Western companies can no longer rely on the use of purely financial criteria to guide their strategy, as the world transitions to the New Normal.

It is 5 months since the blog launched its IeC Downturn Alert, using prices from 29 April. It wrote then that:

“They don’t ring bells at market turning points. Otherwise, we could all retire to the Bahamas.”

But its argument was that a peak was likely, as crude oil had remained stable at $125/bbl for 4 weeks.

Buyers had previously bought forward as prices rose, to protect downstream margins. Now they would try to reduce this unwanted inventory. Equally, oil prices at April’s level had always led to recession in the past, and it was unlikely that ‘this time it may be different’.

Evidence that a Downturn is now underway is all around us:

• European cracker operators are mostly at 70-75% operating rates
• A major naphtha surplus has developed in India and the Middle East
• Crackers in Japan, Taiwan and parts of SEA are running at 80-90% rates, with S Korea set to join them
• The US Federal Reserve is forecasting GDP growth of just 1.6%, half its June estimate

Coincidentally, as the chart shows, financial markets such as the US S&P 500 Index also peaked on 29 April, although their decline has so far been less dramatic. The high frequency traders who dominate these markets, have no interest in the fundamentals of supply and demand.

Today, however, the only question is ‘how long will the downturn last, and how deep will it be?’ Mario Draghi, the new head of the European Central Bank, forecasts “a mild recession” in Europe. We can all share this hope, but hope is not a strategy. Sensible Boards will develop scenarios that also include a worst case of a sustained and deep recession.

The blog was in a small minority when it launched its Downturn Alert.

Having run major businesses in the past, it knows that buyers always give seemingly convincing reasons when cancelling or deferring orders. It therefore felt it might be helpful to present a global overview, covering benchmark products and regions, to highlight that the problems were general, and not specific.

The industry’s current laser-like focus on year-end inventories means that we should avoid the problems seen in Q4 2008, when inventories piled up around the world. Instead, lower operating rates will mean that buyers occasionally find themselves short of product, as has happened this week in China on polyethylene.

But these short-term issues should not be confused with the potential for a quick recovery.

The Downturn Alert has hopefully helped the industry to navigate the last few difficult months. It will now be renamed the IeC Downturn Monitor, to reflect its new role of charting the problems that lie ahead.

ICIS pricing comments this week, and price movements since the IeC Downturn Alert launched on 29 April, are below:

Benzene NWE (green), down 29%. “Demand remains subdued for the current month”.HDPE USA export (purple), down 24%. “Prices were rising, as global buyers began to restock, including in China and S American markets.”Naphtha Europe (brown dash), down 20%. “The market continues to suffer soft demand, and has lengthened from the previous week.”.PTA China (red), down 18%. “Most players were worried that the downturn may extend into the rest of the year because of the poor demand for polyester in China, India and parts of SEA.”Brent crude oil (blue dash), down 12%.S&P 500 Index (pink dot), down 8%

Financial markets have become increasingly nervous in recent weeks, since the blog last reviewed developments in global bond markets.

Its conclusion then was that investors are worrying more about return of capital, than return on capital, as we transition to the New Normal. This is because 272 million westerners are now over 55 years old, and they need security of income as they prepare for retirement.

The chart above updates market moves in the JUUGS (Japan, UK, USA, Germany, Switzerland) and the PIIGS (Portugal, Ireland, Italy, Greece, Spain). Since August (blue column), the 2 groups have seen very different interest rate trends for 10-year government bonds (red line):

• Rates in the JUUGS have been extremely stable. UK and Swiss rates have edged down 0.1%, whilst German rates moved up 0.1%. US and Japanese rates are unchanged.
• The PIIGS have been much more volatile. Greece is now paying 34% vs 22% in August: Portugal’s rate is 12% vs 11%: Italy’s is 6.4% vs 5.7%: Spain’s is 5.5% vs 5.3%: only Ireland’s reduced, from 8.8% to 8.3%.

This suggests Portugal will also need to default on its debts, alongside Greece. Otherwise the burden of interest payments will simply become too large, particularly as austerity programmes lead to recession.

Italy, of course, is the real problem child. It is a rich and large G7 country. But its interest rate is now also close to being unaffordable. Two key questions are looming on the horizon:

• Will it really now allow the IMF to dictate its economic policy?
• What will happen to French and German banks if investors start to question Italy’s ability to repay its debt?

Italy currently owes $416bn to French banks, and $162bn to German banks. It owes a total of $788bn to European lenders. This is the concept of ‘contagion’:

• If Italy’s rates move into the 6.5%-7% area, and remain there, then its default becomes almost certain.
• France, another G7 member, would then be in the firing line.
• Its 3.3% interest rate is already 50%+ higher than those of the JUUGS. This suggests underlying nervousness amongst investors.

Yesterday’s Scenarios hopefully provided valuable insight into the challenges ahead for companies and individuals. They also suggest some Critical Success Factors for achieving a successful transition to the New Normal, as set out in the chart above:

1. Flexibility. This involves adapting to new circumstances and being willing to compromise rather than battling for an impossible nirvana.
2. Change management. The next 20 years will likely see rapid and unpredictable change in the business environment in contrast to the remarkable stability of recent decades.
3. Scenario Planning. Companies need to adapt their planning processes to cope with the greater uncertainty that will come from operating in a more ‘events-driven’ world.
4. Real needs. Over the past 20 years, Westerners have often confused ‘wants’ with ‘needs’. In the New Normal, mere ‘wants’ are unlikely to be reliable market drivers for the future.
5. Action orientation. Uncertainty can breed a loss of energy, and so companies will need to encourage their employees to experiment creatively if they are to move forward.

The positive news is that most Boomers are likely to lead active and healthy lives well into their 60s and 70s. So the opportunities to capture their interest and their business are very large indeed. We will highlight some valuable case studies to help with this process in Chapter 7.

Companies focusing on the emerging economies face similar challenges, as we will discuss in Chapter 6 next month. Their core market will also consist of a currently underserved demographic, those just moving out of poverty and able to afford a bar of soap, or a bra and pair of panties, for the first time.

But the Beatles provide a reliable guide, if we are prepared to listen to their message from ‘When I’m Sixty-Four’. The megatrends such as an ageing population and the need for improved food production provide the key to future success.

The blog will be happy to provide any support or advice that may be helpful to readers as they develop their Action Plans.

International eChem/ICIS are also running three training courses in Houston, Singapore and London during Q4, to help with detailed implementation issues. Please click here for further details.

The transition to the new Normal is likely to be painful and long-lasting.

Future demand growth will be slower as the ageing Boomers spend less and save more.

More regular and deeper recessions are likely to become a feature of the global economy once more, in contrast to the relatively smooth growth seen during the Boomer-led Super Cycle.

Successful companies will also have to venture into the unknown, as until recently the 55+ generation had no real existence as a separate economic unit.

Previous generations usually found their needs at this age were focused on health-related issues – the Zimmer frame of popular mythology.

So as we venture into the unknown, Action Plans can’t be too prescriptive about what we might expect to see over the next 20 years. Chapter 5 of the blog’s free ‘Boom, Gloom and the New Normal’ eBook, co-authored with John Richardson, aims to help with this process.

As discussed yesterday, the Chapter outlines some potential Scenarios to highlight the key variables that need to be considered:

‘All’s Well that Ends Well’. In this scenario, the key dynamic is that there is a rapid adaptation to the New Normal. This may be driven by the observation of the major pain being suffered in countries already at the sharp end of some most unwelcome restructuring – Greece, Portugal, Ireland and Spain, for example. This gives Western politicians the courage to talk seriously about the issues that society now faces, whilst the wider population becomes prepared to listen to their messages and to accept that major changes need to be made.

‘Muddle Through’. In this scenario, there is no rapid adaptation to the New Normal, and although a higher quality of dialogue takes place between policymakers and the electorate than in the past, no firm agreements are reached on key policies and objectives. However, and importantly, social cohesion is retained, and so society does not fragment into warring groups.

‘If You Don’t Know Where You’re Going, Any Road Will Do’. A third scenario is based on the potential for politicians to remain more focused on sound-bites than on formulating policies that will drive long-term success for their populations. In this Scenario, the current dysfunctional state of many Western political systems, and their alienation from the wider electorate, is not a temporary phenomenon but a sign of the future.

‘Don’t Worry, Everything will be Just Fine’. This is the scenario under which the West had been effectively operating for the past few years, ignoring the demographic changes which are taking us in a new direction. It is characterised by an increasingly desperate belief that everything is just about to ‘return to normal’ (i.e. the former SuperCycle), via the magic elixir of either tax cuts or yet more stimulus.

Tomorrow’s post will provide its view of the Critical Success Factors against which Action Plans need to be measured.

The blog will be happy to provide any support or advice that may be helpful to readers as they develop their Action Plans.

International eChem/ICIS are also running three training courses in Houston, Singapore and London during Q4, to help with detailed implementation issues. Please click here for further details.

Today’s economic situation is getting worse, not better. The blog believes this is because most policymakers still refuse to accept the wisdom contained in the Beatles’ ‘When I’m Sixty-Four’ song on their iconic Sgt Pepper album.

The Western BabyBoomers (those born between 1946-70) are the largest and richest generation that the world has ever seen.

But last year, the oldest Boomer reached the age of sixty-four. And ageing Boomers simply don’t need more housing or new cars, as they no longer have to provide for growing families.

So demand patterns are changing, radically, just as they changed in the 1970’s. This was when the arrival of the Boomers set off the economic SuperCycle, as they entered their peak consumption years between the ages of 25 – 54.

Chemical companies are therefore not only facing an imminent economic slowdown, as the blog has chronicled over the past 5 months with its IeC Downturn Alert. They also need to change their business models, to adapt to this New Normal.

This month’s Chapter 5 of the blog’s free ‘Boom, Gloom and the New Normal’ eBook, co-authored with John Richardson, aims to help with this process. The first step is for CEOs to establish a high-powered team, operating with the support of their Board and line managers, to quickly put in place the necessary Action Plan.

The team needs to answer the 4 key questions required for any successful plan:

• Why. The Board needs a clear view of the likely impact of an economic downturn, combined with the demand changes caused by the ageing of the Boomers.
• What. The team needs to highlight the key issues which its plan aims to tackle. Speed is essential, and only the really super-critical issues can be addressed short-term.
• How. Implementation plans are critical. Resources need to be available, and key managers must ‘buy-in’ to the process, otherwise it will fail.
• When. Timing is also critical. Short-term priorities (credit control, working capital) have to be balanced with the business model changes needed to adapt to the New Normal.

The outlook is very uncertain. Tomorrow’s post will discuss the relevant Scenarios that need to be addressed. And on Thursday, it will highlight the Critical Success Factors against which plans need to be measured.

The blog will be happy to provide any support or advice that may be helpful to readers as they develop their Action Plans.

International eChem/ICIS are also running three training courses in Houston, Singapore and London in Q4, to help with detailed implementation issues. Please click here for further details.